Time to Oil the Economy

When it comes to crude oil, what happened to supply and demand economics? Politicians told us if we drilled more, prices would decline. We drilled more and, sure enough, prices did not decline. In fact, they increased.

Everything seems to be in place to expect lower prices. According to the Energy Information Administration's (EIA) latest reports, domestic oil production is up more than 30 percent. The graph shows production declines reversed course and turning at approximately 7,500 thousand barrels per day. Today, it is more than 10,000 and climbing.

Not only is domestic production increasing, but EIA reports demand for domestic products has been flat. Technically, it has been decreasing by about 3% per year.

Increase domestic supplies and lower demand suggests prices would fall. They are not. EIA is reporting that average domestic crude oil prices actually climbed by 50%. The next graph tells the story.

The graph represents average monthly production and average monthly prices. Prices shown are for West Texas Intermediate (WTI).

High prices suggest oil supplies remain tight. Because WTI's prices are lower than other markets, it is difficult for offshore suppliers to supply North American refineries. They can earn higher margins in other markets.

Add to that, the fact that domestic exploration and drilling is costing more. Since 2007, EIA reports that average drilling costs increased by about 300%. Offshore wells' finding costs have jumped 400% since 2003.

When it comes to oil production, the low-hanging fruit has already been harvested. While there remain plentiful amounts of low-cost oil, the marginal oil is coming from increasingly costly sources. Each year, some of those sources are becoming even more expensive to find, lift, process and deliver.

There is an exception. It is Albertan oil. It is already in production. It has a relatively low production cost. Adding more Albertan oil could relieve supply pressures from U.S. markets. In addition, lower costs could help stimulate the U.S. economy.

Of course, there are environmental considerations. From the perspective of production, environmental concerns are Canada's business. Given Canada has already made the decision to produce cheap Albertan oil, the environmental question for the U.S. should be limited to transportation.

It should now be clear to Washington policymakers that pipelines are safer than many other alternatives. Over the last several months, North America witnessed oil trains with hundreds of railcars becoming virtual pipelines. They have also been the source of some spectacular accidents.

Trucks and barges have also been used as virtual pipelines. Like trains, there has been their share of accidents and spills.

Expanding TransCanada's (TRP) Keystone XL Pipeline seems to be a prudent choice. Keystone will provide the domestic market with lower-cost crude. It could lower energy costs. It can supplement the domestic production. It also could provide a safer source of energy.

It is time for Washington to fish or cut bait. The economy needs a boost. The oil industry needs sources of lower cost crude. The environment needs a break from runaway trains and truck accidents. Citizens need jobs. Communities need a tax base.

In addition, there is no practical alternative to crude oil. The nation needs oil for transportation. Even if Westport (WPRT), Tesla (TSLA), General Motors' (GM) Volt, Nissan's leaf and other clean sources of transportation gain traction, it could take decades for them to become ubiquitous.

Washington needs to end the drama and make a decision. The nation's oil supplies are tighter than many realize. The economy needs oil.